Investing can seem like a mysterious and even intimidating concept. But it doesn’t have to be. Most of us understand the basics, but when it comes to actually doing it for ourselves, there are many variables and risks to consider.
The truth is, with the wealth of educational material out there, as well as the access to many financial services’ platforms, there has never been a better time to start investing.
Here is a simple approach to learning about the “intimidating” investment world, organized into five simple steps.
1. Financial literacy
The first thing you want to do is get comfortable with investing terminology. Explore sites like Investopedia or The Motley Fool, as well listen to financial podcasts like The Money Tree. Learning about investing can be like learning a new language, so don’t be too hard on yourself.
The first few words of the investing language deal with the the various investment vehicles there are to choose from. The first avenue for investing you may have heard of is the stock market. Stock is essentially the capital raised by a business when it issues shares.
In the event of liquidation (when a business is terminated), the net assets of the company are distributed among the shareholders. There are two types of stock: common and preferred. While common stock shareholders have the right to receive dividends and can vote in shareholder meetings, preferred stock shareholders have a higher claim on a company’s assets and a preference in terms of the payment of dividends.
There are many more types of investment vehicles to learn about, such as bonds, ETFs, private equity, and real estate investments. My personal favorite is a mutual fund, which allows you to buy shares of a pool of investments such as stocks, bonds, and other assets. I like to think of a mutual fund as working in a team with other investors, as we try to achieve an objective, which is usually stated in the mutual fund’s prospectus (a summary of the fund).
Now that we have covered the initial framework of investing, let’s shift our focus to best practices and the basics of what to consider when investing for the first time.
2. Investment Practices
As you become more familiar with the world of investing, you will be given investment advice. Investment advice on best practices usually deals with one or more of the following topics: risk, time, diversification, and cost.
Risk seems to be the main fear associated with investing. That is, the risk of losing money. A Forbes article describes how the the finance industry defines risk as volatility, while investors define risk as the loss of purchasing power. Purchasing power is simply the financial ability to buy securities. No matter what, there will always be risks involved, but the key is to understand the implications of those risks, and to take your time in making any financial decision.
Time is also really important. Investing may require you to be ready to buy and sell at any time, and in other instances it may require you to be patient. For example, Forbes states that investing in stocks should be for a minimum of five years. Make sure you understand the time commitment associated with each investment, and plan ahead.
Diversification is key. Learn about the various investments vehicles, sectors, as well as the different impacts of your investments. Make sure to also understand the costs involved. Small costs will have a big impact when multiplied over a long period of investing. Since you might be considering investing for the first time, it’s important to consider your needs in relation to all of these concepts. In other words, what are your financial goals?
3. Financial Goals
The characteristics of your financial goals, such as their expected timeline, will help you choose your investments.
For example, if you have a short term goal to save for a deposit on a house that you hope to buy in 2–5 years, you may choose to eliminate all risks and not invest at all.
However, if your goals are more long term and you are looking ahead to your retirement, you may want to consider the stock market.
In a Telegraph article, Alistair Cunningham said: “Getting the time horizon right is important. Pension money may not be touched for decades, and studies show that exposure to stocks and shares is likely to give the best return.”
Other ways to look at financial goals is in terms of returns, savings, getting out of debt, retirement planning, income, and my personal favorite: impact. Using investments as tools to support positive change is now more popular than ever. Impact investing is all about maintaining a productive portfolio that also leads to real-world results for your chosen values and objectives.
4. Robo or Human Advisor?
The next question you want to ask yourself is would you prefer to work with a human financial advisor or with a robo-advisor.
A robo-advisor is a digital platform that provides algorithm-driven financial services with minimal human intervention. Take your time to study both. It all depends on your preference, and the type of approach you want to take with your investment strategy. If you choose a human, learn about their fees. I prefer an advisor that charges a wrap fee and operate as a fiduciary (oh look, a new word!).
Many of them will require a minimum to invest, usually around $1000. Make sure you feel comfortable with your advisor, as you want them to fully understand your situation before offering you recommendations.
If you choose a robo-advisor platform, make sure to also understand all fees. Reach out to their support team and ask questions. Lastly, you could simply do it yourself, especially given the wealth of information online. You may want to seek professional help to navigate the intricacies of investing before you get started on you own.
5. Start Small and Keep Learning
According to the Cut, “The most common investing mistake is to not do it at all.” You have many years ahead of you, and it’s never too early to start learning. Read, read, and read some more. The world of investing is vast, but by following these simple steps you should be fluent in investing in no time! Here are some good resources for you to continue your learning on investing:
- Investopedia Academy’s course on “Become A Day Trader.”
- Play a stock-market-simulator games
- Read about Warren Buffett’s advice on index funds
- Blog called Getting your Financial Ducks in a Row
- The Share Save Spend club called Money Sanity U
Newday Impact Investing
At Newday, we have a variety of thematic portfolios, which include Ocean Health, Gender Equity, Low Carbon, and the Global Portfolio.
As we create more portfolios that connect to a broader range of ESG themes, we provide information and support to our clients who are looking to “Get Informed, Get Involved, and Get Invested”.
Our mission at Newday is to empower you to invest with your conscience. By providing access to our impact investing platform, we hope to inspire every individual to invest alongside their values. Learn more about us and sign up for early access today.